Cutting back on one £3 drink a week could generate additional pension savings of more than £14,000
As the tax year draws to a close, savers and investors will be exhorted to use their Isa allowance before they lose it. However, while the focus is on the generous £15,240 Isa limit — rising to £20,000 in the 2017-18 tax year — the reality is that few people have such large sums available. Still, it’s important not to be intimidated by the figures; Isas can be valuable savings vehicles even for those with smaller amounts to put by — and finding those sums may be easier than you imagine.
The key is to focus on regular savings, rather than trying to find a large sum in the final few weeks of the tax year. If you can commit to putting by, say, £100 a month, you’ll soon start to build a sizeable pot of cash savings. For example, saving £100 a month over five years will net you £6,305, assuming an interest rate of 2 per cent a year. If you can shift your return to 5 per cent — say, by investing in stock market assets — the final sum would be £6,800.
Making regular contributions in this way will almost always be an option whether you use your Isa allowance to invest in cash savings or the stock market.
Most cash Isas accept monthly contributions, or you could opt for a specialist regular savings account; the best deals come from building societies such as Progressive and Vernon, which pay annual rates of 1.5 per cent a year on monthly contributions of £20 or more. Lifetime Isas, to be launched in April, will be another option, with the government adding £1 for each £4 you save, up to a maximum of £4,000 a year, on top of the returns you earn.
The alternative is a regular savings plan from a stocks and shares Isa provider. These schemes drip-feed your money into the stock market each month and feature minimum monthly investments of as little as £20. They can even help to smooth out the ups and downs of stock market investment, because your fixed monthly contribution buys more shares during months when prices have fallen.
Regular savings plans have been proving their worth for many years, says Annabel Brodie-Smith, the communications director at the Association of Investment Companies. “Savings schemes remain compelling given the choice and diversity on offer. Looking at the competitive charging structures of many saving schemes, it’s easy to see why. There is good flexibility too, such as the ability to stop and start contributions at any time, and low minimum investments.”
If your bank statements suggest you don’t even have pennies to finance monthly Isa savings, now might be the time to consider what might be possible by making small economies.
Start with your weekly shop, and switch from branded goods to supermarkets’ own-brand products. The comparison site mysupermarket.com has calculated that moving to own-brand goods could cut your bill at the checkout by as much as 30 per cent. If you’re spending £100 a week on groceries, that works out at an annual saving of more than £1,500.
What about energy bills, particularly now it looks as if gas and electricity prices are set to increase again? Energy Helpline, a leading price comparison service, says households that have never switched energy provider could save more than £300 a year by shopping around for a better deal. And you can make savings even without switching — turning down the heating by a single degree will save the typical household £85 over a year, according to the Energy Saving Trust.
Alternatively, it may be time to cut down on expensive luxuries. For example, if you’ve developed a costly caffeine habit, can you cut back? A medium latte at Costa Coffee will set you back £2.45, so if you’re buying one, say, on three out of five working days a week, you’re spending more than £350 over the year. Equally, if you tend to lunch in expensive sandwich shops — a sandwich, drink and a piece of fruit from Pret A Manger, for example, will cost more than £5 a day — moving to packed lunches made at home could save you even more.
If the sums at stake seem trivial, take a look at research conducted by the insurance company LV, which has mapped the potential long-term investment returns available to people prepared to make small adjustments to their lifestyles. It found that cutting back on one £3 alcoholic drink a week could generate additional pension savings of more than £14,000 for a 30-year-old saver. If you smoke, cutting down by one packet a week would deliver savings of £33,000, LV’s analysis shows.
Such figures seem incredible, but they reflect the effects of compound interest on long-term savings and investments — as well as the amount of money people spend unnecessarily without thinking about it. Matt Sanders, the head of money at the price comparison service gocompare.com, says: “The odd couple of pounds spent here and there on a coffee or a sandwich to eat at your desk may not seem extravagant, but over time lots of little money leaks can add up to a sizeable drain on your finances.”